Chapter 5

Planning For Uncertainties

• Why You Need Insurance

• Types of Insurance
• Takaful
• More About Insurance
RISK: WHAT IS IT?
Risk = the possibility of financial loss

Why is risk important for insurance?

Risk is what makes you decide whether or not you need insurance.
Risk is what insurance companies measure
when determining whether to offer you insurance and how much it
will cost.

Generally speaking:
> Risk = > Cost
 HOW DO WE HANDLE RISK?

1. Avoidance: Choosing not to participate in an activity

because of the risk involved, e.g. not getting a driver’s
license, not going for holiday etc;

2. Retention: Saving money in case of future losses, e.g.

putting RM1K in a savings account in case of a car
accident;

3. Transfer: Passing the risk on to an insurance company,

e.g. paying a premium fee for an insurance policy and
expecting the insurance company to protect your assets.
 What is Insurance?
Insurance is a legal contract that transfers
risk from a policyholder to an insurance provider

WHY YOU NEED INSURANCE

• Protection against loss due to hazard and

No one can predict the future. unexpected events
Being prepared is the best
defence you can have to guard
• Compensation for damages for personal
against unforeseen uncertainties belongings
• Increased Medical Bills
• Living expenses in disability or serious
illness
 HOW DOES INSURANCE WORK
• Insurance company pay for damages due to
insured peril up to the limit of sum insured

Premiums • Insurance company sells policies to many

people and pool the premium collected into
a common fund.

•The common fund helps to share risks

Insurance
Provider Claims

HOW INSURANCE WORKS

TYPES OF INSURANCE
Insurance is classified into:

1. Life Insurance and

2. General Insurance

1. LIFE INSURANCE
• Insures against premature death, illness, disability and
hospitalization

• Risk Factors: Age/Gender/Height & Weight/Medical

record/Personal habits (smoker, drinker etc)/Occupation

• **Amount of coverage required**

2. GENERAL INSURANCE

• Any insurance other than human lives comes under

the scope of General Insurance

• It is preferable to call this as General Insurance

instead of non-life insurance
– Motor
– House
– Travel
– Personal belonging
 Personal Risks Strategies
Risk Events Financial Planning Measures Defensive
consequences Instruments
Death Income loss Estate planning Life insurance
Final expenses Insurance planning
Disability Income loss Insurance planning Life insurance
Treatment costs Health program
Critical Illness Income loss Insurance planning Dread diseases
Treatment costs Health program insurance
Health insurance
Direct/Indirect Income loss Insurance planning General insurance
property Replacement costs
Loss/Damage Repair costs
TYPES OF LIFE INSURANCE
1. Term insurance
• The most basic, and generally least expensive, form of life insurance for
people under age 50.
• The policy term is typically 1 to 10 years, and may be renewable at

the end of each term.

• The policy benefit is payable only if the insured dies/become

totally & permanently disable during the policy term.

TYPES OF LIFE INSURANCE – con’t
2. Whole Life

• combines permanent protection with a savings component.

As long as you continue to pay the premiums, you are able to lock in

coverage at a level premium rate.

• Part of that premium accrues as cash value. As the policy gains
value, you may be able to borrow up to 90% of your policy's cash
value tax-free.
• premature death occurs
The proceeds of this plan are payable when

or the policy maturity date is reached.

TYPES OF LIFE INSURANCE – con’t
3. Endowment
• Combines protection and savings.
• This policy provides cash benefits at the end of a specific period

• or also (cash benefits) upon death or total and permanent disability

during the same period.

4. Investment – linked
• Combines investment and protection.
• Under this policy, you get to choose the type of investment fund – stock, bond or

money market funding options and the amount of life insurance coverage.

5. Medical & heath

• cover the cost of medical treatment
• hospitalization
• & surgery
DEVELOPMENT OF TAKAFUL – WORLDWIDE
PROSPECTIVE

• Takaful or Islamic Insurance is a new industry.

• Takaful was initially undertaken in Sudan 1979 and Malaysia in 1984.

• Takaful operations open up

in many countries in the past two decades
especially in large Muslim community.

• Currently more than 50 takaful operators worldwide including

some non-Islamic countries.
Development of Takaful – Malaysia Case Study

• Takaful industry is relatively new compared to conventional

insurance companies in Malaysia.

• The National Fatwa Committee of the Malaysian Islamic Affairs Council

declared the conventional life insurance business
contradicted with Islamic principles in 1972.

• In 1985, the Fiqh Academy of the OIC made a declaration that all forms
of conventional insurance do not conform with
Islamic principles.
Development of Takaful – Malaysia Case Study
• Takaful Act 1984 was introduced to supervise the takaful
activities since Insurance Act could not be applied to the takaful
business in Malaysia.

• Takaful Malaysia Sdn. Bhd. was established in 1984 with

paid-up capital of RM10 Million and there are four takaful operators in
Malaysia.

• Four Takaful operators are:

• Takaful Malaysia
• Takaful Nasional Malaysia
• Maybank Takaful/etiqa
• Takaful Ikhlas
Basic Concepts of Takaful

• Al-Mudharabah – means ‘profit sharing’.

• Al-Takaful – means ‘joint guarantee’.
• Tabarru – refers to elements of ‘donation’.

Why Conventional Insurance does not conform with the

requirement of the Syairah?

• Al-Gharar – refers to ‘unknown’ or ‘uncertain’ factors in a conventional

insurance contract.
• Al-Maisir – refers to ‘gambling’ element and is said to derive from the ‘gharar’
element.
• Riba – refers to the ‘interest’ factor present in the investment activities of
conventional insurance companies.
 Basic Concepts of Takaful
• Al-Mudharabah – means ‘profit sharing’. The
takaful operator accepts and invests the takaful
contributions (Premiums) received from the takaful
participants. The contract will specify how the
profit will be shared between the participants and
takaful operator.
 Basic Concepts of Takaful
• Al-Takaful – means joint guarantee whereby the
participants jointly guarantee amongst
themselves. Any member faced with a
calamity will be financially compensated
from funds contributed by the participants.
• Tabarru – refers to elements of ‘donation’. Each
participant agrees to relinquish a portion of
the takaful contribution to a common
fund that is used to pay a member that
suffers a loss.
Why Conventional Insurance does not conform
with the requirement of the Syairah?

1. Al-Gharar refers to “unknown” or “uncertain”

factors in a conventional insurance contract.

• In conventional insurance, it is not made known to the

policyholders on how profits are distributed and in
what the funds are invested in.
• In a takaful operations which is based on the “Mudharabah”
concept, the distribution of profits to the operations
and the participants in the contract are clearly
outlined.
Why Conventional Insurance does not conform
with the requirement of the Syairah?
2. Al-Maisir refers to “gambling” element and is said to derive
from the “gharar” element.

• In conventional insurance, the policyholders stands to lose

all the premiums paid if the risk does not occur. On the
other hand, he stands to get more should a misfortune
happens whilst paying small amount of premium.
• In takaful, even
though the risk does not occur, the
participant is entitled to get back the
contributions that he has paid. Should the risk occurs,
he will be paid from his amount of premium fund
plus the pool of funds from the “donation” of
other participants.
Why Conventional Insurance does not conform with the
requirement of the Syairah?
3. Riba refers to the “interest” factor present in the
investment activities of conventional insurance companies.
• The policy loan in conventional life insurance is in fact a
“Riba” based transaction.

• Islam prohibits any investment activities which is

interest based, in alcoholic beverage and
non-halal products.
 Takaful Models
• Non-Profit Model - Social governmental owned
enterprises and programme operating on a non-profit
basis. The contributions paid by the participants are wholly
for tabarru (donation) to unfortunate members.
• Al-Mudharabah Model - The co-operative risk sharing
where participants and operators share in the distribution
profit.
• Al-Wakala Model - In this model, the co-operative risk
sharing occur among the participants with a takaful
operator whereby a fee is agreed to be paid to the
operators for the services rendered. The operator shall not
participant in the underwriting results.
Takaful
Family Takaful
• Individual/ family
• Retirement annuity
• Investment link
• Medical and health

General Takaful
• Home
• Motor
• Personal accident
Takaful
1. Family Takaful – Family takaful is a combination of
protection and long-term savings and usually covers a period
of more than a year. It provides financial benefits if you
suffer a tragedy as well as gives you investment profits.
Contribution payments can be paid monthly, quarterly, semi-annually or
annually.

2. General Takaful Operation – This protects you on a

short-term basis, usually for a one year period, for any loss or
damage to your property or personal belongings. You pay
a one-time contribution on an annual basis.
Family Takaful
• A. Individual/ family
• With plans that include education, mortgage and health,
you and your beneficiary will receive financial benefits arising
from death or permanent disability. There are also long-
term savings and investment, profits are distributed
upon claim, maturity or early surrender.

• B. Retirement annuity
• This a plan that provides you with regular income upon
retirement.
Family Takaful
• C. Investment link
• Combining investment and protection, part of your
contribution is used to buy investment units while
the balance goes towards providing coverage in the
event of death or permanent disability.

• D. Medical and health

• This covers the costs of medical; treatment, including
hospitalization and surgery.
General Takaful
• A. Home Takaful

• 1. A house owner takaful covers your house against loss or

damage caused by flood, fire and other similar perils,

• 2. A house holder takaful covers loss or damage to the

contents of your house.

• You may participate in either one or both.

General Takaful
• B. Motor Takaful

• You are covered against loss or damage to

your vehicle due to fire, theft or an accident as well as
bodily injury or death of a third party and loss or
damage of a third party’s property.
• As with general motor insurance, the two types of cover are
third party and comprehensive.
General Takaful
• C. Personal Accident

• This provides
you or your beneficiaries with
compensation in the event of death, disablement or injuries arising
from accident.

• This plan is also available for a short duration, such as

when travelling abroad.
 General Takaful Operation Flowchart
PROFITS
ATTRUBUTED TO
SHAREHOLDERS

COM PANY'S
ADM INISTRATRTION
COM PANY & M ANAGEM ENT
EXPENSES

TAKAFUL
INVESTMENT PROFITS
CONTRACT BASED
BY FROM
ON PRINCIPLE OF COMPANY INVESTMENT
AL-M UDHARABAH

OPERATIONAL
COST OF SHARE OF
TAKAFUL SURPLUS FOR
THE COM PANY
PARTICIPANT TAKAFUL GENERAL GENERAL OPERATIONAL
CO NTRIBUTIO N FAMILY FAMILY COST OF SURPLUS 40% (Exam ple only)
PAID BY ACCOUNT ACCOUNT FAMILY (PROFIT)
60% (Exam ple only)
OPERATIONAL SHARE OF
COST OF SURPLYS FOR
THE PARTICIPANT
TAKAFUL

Source: BIRT (1996)

 Operation Flowchart of the Family Takaful Plan
PROFITS
ATTRUBUTED TO
SHAREHOLDERS

CO M PANY'S
COM PANY ADM INISTRATRTIO N
& M ANAG EM ENT
EXPENSES

TAKAFUL
INVESTMENT PROFITS 30% (Exam ple only)
CONTRACT BASED
BY FROM
ON PRINCIPLE OF COMPANY INVESTMENT 70% (Exam ple only)
AL-M UDHARABAH

PARTICIPANTS PARTICIPANT PARTICIPANT PAYMENT TO

PARTICIPANT ACCOUNT ACCOUNT ACCOUNT PARTICIPANT
TAKAFUL
FAMILY
INSTALLMENT
TAKAFUL
PAID BY
FUND
PARTICIPANT
PARTICIPANTS PARTICIPANTS
TAKAFUL PAYMENT TO
SPECIAL SPECIAL
BENEFITS PARTICIPANT
ACCOUNT ACCOUNT

Source: BIRT (1996)

Information to consider before
buying insurance policy
• Understand about the types of policies
• Carefully assess what you need to protect
• Decide how much you want to insure – the level
of coverage
• Compare *insurance companies and their
policies
• Ensure to buy insurance through an agent
appointed by a licensed insurance company
• Making a claim – under what situation & how to
make claims